Singapore Economy

According to IMD World Competitiveness Ranking, Singapore retained the top spot as the world's most competitive economy in 2019, switching place with the US. However, around fifty years ago the country was rife with unemployment, low-skilled workers, and foreign trade barriers. What has led to this remarkable shift in Singapore's economy? Read on to find out!

Singapore’s economic history

Singapore's economy is closely linked to its political environment. Thus, to understand the Singaporean burgeoning economic scene, we need to look back to its formation days, starting with the British rule.

Singapore under British colonisation

The modern history of Singapore began in 1819 when British statesman Stamford Raffles established a trading port on the island of Singapore. Later it became a British colony as part of the Straits Settlements. The bustling port activities attracted thousands of migrants from nearby Asian countries, especially China and India to come and settle on the island.

In 1867, the British agreed to make the Straits Settlements a separate crown colony. Over the next two years, the Suez Canel was opened and trade in Singapore experienced a dramatic surge. By the early nineteenth century, Singapore became the British main naval base in East Asia. However, during World War II, Britain failed to protect its colony from the Japanese who renamed the port city Syonan (Light of the South).

Gaining independence

When Britain returned to rule over Singapore in 1945, its credibility had been destroyed in the public eye. Eventually, the Straits Settlements disintegrated and Singapore became a separate crown colony.

In 1963, the country joined the Federation of Malaysia. However, it exited only after two years due to the dispute of politics and ethnicity. 31 August 1963 also marked Singapore’s independence from the United Kingdom. Yusof bin Ishak became the president and Lee Kwan Yew was the influential prime minister.

Despite its sovereignty, Singapore’s economy was in trouble. The high unemployment rate coupled with the shortage of housing, sanitation, and water supply gave rise to serious crime and diseases. Singapore was sandwiched between two large, unfriendly neighbours: Malaysia and Indonesia. Meanwhile, prime minister Lee's pleas for international assistance went unnoticed.

Embarking on globalisation

At the time, Singapore's economy still benefited from the entrepôt trade - the importing, storing, exporting of goods at the port. Yet, these services didn't provide ample job opportunities for the local people which was what Singapore desperately needed to boost its employment rate.

This led to the launch of an intensive program of industrialisation with a focus on labour-intensive industries. However, this was met with two main challenges:

1. The country didn't have an industrial tradition. The majority of its workforce was experienced in trade and services.
2. The neighbouring countries were less than willing to collaborate for development.

Under the pressure to find jobs for its people, the leading party of Singapore joined the race of globalisation. Taking inspiration from Israel's trading with Europe and America after being boycotted by its Arab neighbours, Lee reached out to the developed world and persuaded the multinational companies to invest in his country.

Stabilising the economic and political climate

To attract foreign investment, Singapore had to prove that it was a safe and profitable economy. Thus, in addition to lowering taxes, Singapore enforced tighter laws to clean up the post-war disordered scenes.

Corruption and trade of illegal drugs became the worse crimes in Singapore: they could cause the offender to face death penalties. All independent labour unions were grouped into one single union, the National Trade Union Congress (NTUC). And any behaviour disrupting ‘national, political, corporate unity’ could put a person in jail.

With these harsh law enforcement, Singapore's economic and political conditions quickly stabilised, giving it a competitive edge to acquire funding from abroad.

Singapore's economic success

The strict government rule may trigger debates about human rights and the rule of law, but there's no doubt about its economic effectiveness.

Only 7 years after its independence (1972), Singapore had become a foreign investment magnet. More than one-fourth of Singapore's manufacturing firms partnered with or were owned by a foreign entity. The majority of the investors came from the United States and Japan. The country also achieved a double-digit economic growth rate every year.

Fig 1. - Singapore's foreign domestic investment from 2000 to 2019.Created with data from the World Bank, data.worldbank.org

With massive foreign fundings, Singapore invested heavily in its human resources and infrastructure. Technical schools were opened and international corporations were hired to train unskilled workers in high-demand fields such as technology, petrochemicals, and electronics. Education on tourism and transportation were also given close attention.

In the 1970s, the country's main exports were mostly textiles, garments, and basic electronics.¹ Twenty years later, it had dabbled into electrical machinery, computers, optical, technical, medical apparatus, gems, and precious metals. (See Figure 2).

Figure 2. Singapore's top 5 exports 2020. Created with data from World's Top Exports, worldstopexports.com

Singapore’s market economy

Nowadays, Singapore is a highly developed free-market economy.

Entrepôt trade still makes up about one-third of Singapore's exports. The Port of Singapore is also the world's busiest business transhipment port, surpassing Hong Kong and Rotterdam. In terms of the cargo tonnage handled, it takes the second spot only to the Port of Shanghai.

Singapore has a robust trading relationship with many of the biggest economies of the world such as China, the USA, Indonesia, Malaysia, and Japan. There are over 37,000 international firms in Singapore, and 7000 multinational corporations are headquartered there.

The tourism and service industry of Singapore is thriving, with over 18 million visitors coming to the port city in 2018, spending roughly $27.1 billion on their trips.

Banking in Singapore is another prosperous business sector, especially after the rise of tax by the Swiss, which caused many people to move their assets from Switzerland to Lion City. Other fields like biotech and oil refining also bloom in Singapore.

With merely 433 square miles and a population of 5.7 million people, Singapore has achieved a remarkable GDP of more than $300 billion annually, much higher than most parts of the world.²

Singapore's economic ranking

• The country scored 89.7 on the economic freedom index, making it one of the freest in the world to trade.³
• The World Economic Forum scored Singapore 85 out of 100 in terms of global competitiveness.⁴
• The country ranked first as the most open market according to ICC Open Market Index in 2017.^⁵
• Singapore is the third least corrupt economy in the world.^⁶
• Its GDP per capita takes fourth place on the world chart.⁷

What are the reasons for Singapore’s economic success?

There are many factors contributing to the success of Singapore's economy, but let us consider three of the main factors:

1. Capitalised its advantage. Singapore has capitalised on its strategic advantage: a port country. Singapore displays strength in ship management and shipbroking, which makes it one of the world's most important commercial maritime destinations, along with Hong Kong, London, Shanghai, and Dubai.
2. Embrace of globalisation. Shortly after its independence, Singapore began trading with developed countries and convinced multinational companies to set up manufacturing in its territory. This has allowed the country to overcome the lack of collaboration with neighbouring countries. To attract investors, Singapore works hard to create a stable economic and political environment, even if it has to enforce stricter laws and regulations for its citizens.
3. Investment in education. Singapore puts education before everything else as only education can provide workers with high marginal productivity of labour.

References

1. Ping Zhou, The History of Singapore's Economic Development, ThoughtCo., 2019.

3. Singapore Index of Economic Freedom, Heritage, 2022.

4. Singapore crowned the world's most open and competitive economy, We Forum, 2019.

5. ICC Open Markets Index 2017, International Chamber of Commerce, 2017.

6. Singapore Transparency Score, Transparency, 2020.

7. Avery Koop, Mapped: GDP per Capita Worldwide, Visual Capitalist, 2021.